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Marijuana’s not exactly a growth industry: Olive

One of the most promising business opportunities on the horizon, you’ve been hearing lately, is marijuana. “Marijuana Inc.” is already a $3 billion trade in Canada. And it’s poised to triple in size when, not if, pot is decriminalized for general, or recreational, use.

Federal Liberal Leader Justin Trudeau has embraced decriminalization of cannabis. And here’s where the entrepreneurial heart beats faster: By his party’s estimates, Canada will need at least 2,700 legitimate cannabis retail outlets if the trade is to be wrested from organized crime.

Sociologists are finding a parallel between the increasing public support for legalization of recreational pot use and the similar relaxation in attitudes toward same-sex marriage and, in the U.S., a humane “path to citizenship” for illegal immigrants. In a recent BusinessInsider.com canvass of pro-legalization tycoons, Richard Branson despairs that “Millions of otherwise productive lives are wasted in jail for marijuana possession and other nonviolent drug violations.”

Governments are sure to act, the story goes, given the estimated $2.5 billion the B.C. treasury alone would reap over five years from taxes on legalized cannabis products and fees collected from licensed pot growers and merchants, according to a recent study by researchers at the University of British Columbia and Simon Fraser University. The far larger and more deficit-encumbered Ontario might salivate over that. It already pockets a total of $3.5 billion a year in similarly effortless “dividends” from the LCBO and the Ontario Lottery and Gaming Corp. (OLG).

Government is, after all, an old hand at exacting its sin-tax share of tobacco, alcohol and gambling revenues. Voters in Colorado and Washington State last November made their states the first in the U.S. to legalize recreational pot use. How long will it be, as with lotteries and casinos, before every province, territory and state is clamouring for its own legit pot industry rather than risk losing trade and tourism dollars to neighbouring jurisdictions?

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“There’s a lot of money in it,” Steve Siebold, author of Sex Politics Religion: How Delusional Thinking is Destroying America, recently told the International Business Times. “So once they start seeing the money that’s coming in, the states and Washington [D.C.] will say, ‘We want a cut of that action.’”

Well, don’t count on it. High times are bound to remain where they currently are, on the horizon, for what one pro-legalization U.S. expert estimates to be “a couple generations.”

There’s nothing inevitable about legalization of recreational pot use. A U.S. presidential commission called for legalization back in 1972, and 41 years later the Pew Research Center says that only now, for the first time since it began asking the question in 1969, does a slim majority of Americans support decriminalization. Whatever the polls say, there is no urgent demand that pot be legalized. Even legal use of cannabis for medicinal purposes is modest. By 2012, only 28,115 Canadians had obtained Health Canada authorization for pot use in relief of pain from cancer, glaucoma, HIV/AIDS, arthritis, gluten intolerance and so on.

The Obama administration on its own, without reference to a gridlocked Congress, could remove simple possession of pot from the federal criminal code — a relief to the 50,000 to 100,000 Americans behind bars for pot offences on any given day — but it has shown no interest in doing so. Stephen Harper, meanwhile, has toughened laws on cannabis in his government’s recent omnibus crime bill, with no accompanying public outcry.

Pot is not a big business, nor is it destined to become one. If Canadian cannabis industry revenues were to triple, as is commonly expected with legalization, the business would be equal in size to the $9.1 billion worth of beer consumption Statscan reports for 2011. Beer may loom large in the culture, but it’s so small an industry that just two multinational firms dominate it worldwide. And at an estimated $18 billion (U.S.) a year, the entire U.S. pot trade matches the revenues of Whirlpool Corp., ranking 147th on the Fortune 500. In short, cannabis will never be a Silicon Valley-like magnet for talent and start-up funds.

Cannabis production is both capital and labour intensive. Most pot consumed in North America is grown outdoors in Mexico and harvested by low-cost labour. North of the Rio Grande, pot is grown indoors by employees paid $11 an hour-plus. Year-round temperature control drives up the power bill for Denver’s Pink House Blooms, one of the state’s prominent growers, to $14,000 a month. So do the 48 security cameras at Pink House Blooms, one for each room with plants, as required by state law.

The average revenues for America’s 4,000 or so pot farms is $325,000, considerably shy of the annual sales rung up by your local Tim Hortons outlet. Subtract costs and government licensing fees and you might eke out a 6 per cent profit margin. That’s if your finicky marijuana crop isn’t wiped out by mildew or spider mites.

Intensified competition is pushing down pot prices. In the Denver market, prices have fallen by half, from $3,900 to $2,000 a pound, in the past two years. Street prices remain lofty only in those places where pot is still illegal. Legal protections for pot entrepreneurs are scant. It’s pointless to build a brand name, for instance, since rivals steal them with impunity, given that patent and trademark authorities don’t recognize cannabis-related goods.

At some point well short of legalization of recreational pot use, somebody will do the compulsory risk-reward analysis. Quite possibly the conclusion will be that productivity losses from absenteeism, turnover and accidents, more inattentiveness in the classroom and a Don Valley Parkway where every 20th motorist is legally buzzed argues for the status quo.

The two iron rules of tobacco, alcohol and gambling (and prostitution) are that, one, almost everyone who wants these things is already getting them. Claims of potential additional demand are exaggerated. Pot entrepreneurs will have to take business from rivals, because the pie won’t be expanding. That’s pretty much opposite the dynamics of the smartphone market.

The other rule is that you make most of your profit from your heaviest users.

Mark Kleiman is a public policy professor at the University of California, Los Angeles, who is advising Washington State in its pot-legalization process. “The only way to get a lot of revenue,” Kleiman recently told Associated Press, explaining why he’s counselling Washington State not to anticipate a windfall from legalized pot, “is to sell a lot of marijuana. And the only way to sell a lot of marijuana is to sell to people who smoke a lot of marijuana. And that’s not a good thing.”

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